Low labour productivity, weak competition in logistics and transport, subpar infrastructure, and high tariffs and excise taxes on exports are just a few of the challenges stalling Nepal’s growth. An underperforming manufacturing sector, an underdeveloped tourism industry, sluggish hydropower development, limited infrastructure, regulatory challenges, and digital literacy gaps also contribute to the stagnation.

These issues have created an economy that generates few jobs and forces over half a million people to seek jobs abroad annually.

The World Bank flagged these concerns in its report ‘Nepal Country Economic Memorandum: Unlocking Nepal’s Growth Potential’ released on Monday.

As Nepal aims to graduate from the least developed countries (LDCs) category by 2026, the report presents a grim outlook.

The worst is yet to come.

The multilateral funding agency warns that Nepal’s potential growth could fall below 4 percent in the long term, jeopardising national ambitions if structural challenges remain unaddressed.

Between 1996, when a Maoist insurgency began, and 2023, Nepal’s economy grew at an average real annual rate of 4.2 percent—a respectable figure given domestic strife and external shocks like earthquakes and the covid pandemic.

However, the report highlights that Nepal’s growth rate lags behind its peers, ranking sixth among eight South Asian nations.

The government’s 16th Plan envisions an average annual real GDP growth rate of 7.1 percent until 2029, far above historical averages. However, the World Bank says that based on its baseline projections, “potential long-term real growth will hover around 4 percent.”

What are the reasons?

Experts point to indicators such as corruption, government ineffectiveness, and political instability behind the country’s poor economic performance. There is increasing recognition that these three indicators substantially and adversely affect economic growth.

Although the World Bank refrains from explicitly citing corruption and political instability as key barriers to growth, analysts argue that corruption has plagued Nepal’s development.

In recent years, multiple scandals have exposed how politicians and those in power misuse their authority, affecting nearly every sector—from government and the judiciary to law enforcement, healthcare, and education.

Transparency International’s 2024 Corruption Perceptions Index scored Nepal 34 out of 100, reflecting widespread corruption.

“The low economic growth trap is a fallout of politics being a thriving, profitable business,” economic analyst Nara Bahadur Thapa told the Post. “Corruption is deeply entrenched and protected by politics.”

For Nepal, labour, capital, and entrepreneurship are fundamental to growth, yet all three are lacking.

“Youth are leaving the country at an alarming rate, creating a massive brain drain. Foreign investors are reluctant to enter the market. No multinational companies look to Nepal. Private investment is low, and agricultural output is weak. These are the reasons Nepal will struggle to grow beyond 4 percent in the long run,” said Thapa.

He emphasised that drastic political reforms are needed as Nepal approaches LDC graduation.

“At an average annual growth rate of 4 percent, even if we graduate, the impact will only be on paper, not in the lives of ordinary Nepalis,” he added.

The LDCs are developing countries listed by the United Nations that exhibit the lowest indicators of socioeconomic development. Nepal is scheduled to graduate on November 24, 2026.

The report underscores the need to strengthen workforce skills, enhance institutional capacity, and improve business competitiveness to boost productivity and resilience. Without these efforts, Nepal’s potential growth could fall below 4 percent in the long term, threatening national aspirations.

Targeted support for hydropower, tourism, and digital services could create significant economic and employment opportunities. Achieving this, however, requires addressing regulatory barriers, improving infrastructure, and fostering a more competitive business environment.

Additionally, better migration policies could maximise benefits and reduce costs for migrant workers, further contributing to economic development.

By 2021, over 7 percent of Nepal’s population had migrated abroad, primarily for employment, due to limited job opportunities at home. Most of these migrants—predominantly young men—seek work in Gulf Cooperation Council (GCC) countries and Malaysia.

This large-scale migration has led to a surge in remittances, which accounted for an equivalent of over a quarter of Nepal’s GDP in 2023. The impact on poverty reduction has been significant.

Nepal has made remarkable progress in poverty reduction, virtually eliminating extreme poverty. In 1995, an estimated 55 percent of Nepalis lived in extreme poverty, defined by the $2.15 per day threshold. By 2023, that figure had dropped to just 0.37 percent.

“Nepal's success in poverty reduction is impressive, but its economic potential remains largely untapped,” said David Sislen, World Bank Country Director for Maldives, Nepal, and Sri Lanka.

“Nepal has significant potential for stronger growth and job creation through key reforms—enhancing migration benefits, boosting exports, efficiently utilising hydropower, and advancing digitalisation.”

The Nepal Country Economic Memorandum, published every five years, outlines a roadmap for faster growth in key sectors and recommends policy actions in four critical areas to unlock Nepal’s economic potential.

First, getting more out of migration. A systematic and institutionalised migration framework could enhance benefits. Integrating migration into national development strategies, job creation, and poverty reduction plans would establish a more structured system.

Policies should focus on reducing costs and increasing safety for low-skilled migrants while working toward skill development and destination diversification, the World Bank report says.

Expanding and effectively implementing bilateral labour agreements would be crucial alongside programs that promote entrepreneurship and reintegration opportunities for returning migrants.

Second, improving export performance. Addressing infrastructure deficits and enhancing market competition in key sectors could boost exports. Managing inflationary pressures would help preserve exporters’ price competitiveness.

Using remittances for investments and business growth could also mitigate inflation.

Simplifying tax refund processes on imported materials and lowering import tariffs would ease export challenges.

Securing additional preferential trade agreements will be vital as Nepal transitions from LDC status and loses trade preferences.

Third, harnessing the potential of hydropower. Developing a clear financing strategy for hydropower expansion would help attract essential investments. This could include broadening the domestic bond market and establishing a robust framework for large-scale public-private partnerships.

Strengthening regulatory and legal frameworks—cutting red tape and streamlining licensing processes—would improve the electricity market structure and attract more investors.

Fourth, boosting the digital sector. Modernising the Telecommunications Act and accelerating digital strategy implementation would spur digital industry growth.

A significant challenge is Nepal’s low level of digital skills, which should be addressed through school curriculum updates and training programs across age groups and demographics.

“The 16th Plan for Nepal envisions good governance, social justice, and prosperity, prioritising productivity, competitiveness, job creation, social security, and a smooth LDC transition,” said Professor Dr. Shiva Raj Adhikari, vice chairman of the National Planning Commission.

“The government is committed to ensuring an enabling policy environment for Nepal’s sustainable growth.”